Nothing to Fear
AHEAD OF THE TAPE By JESSE EISINGER
Step one: Don't panic. Step two: Congratulate one another on not panicking. Step three: Keep ignoring the disrobed emperors.
Wall Street circulated that memo Monday morning after the second-largest buyer of U.S. mortgages, Freddie Mac, got rid of its three top executives. Freddie even attacked one executive for apparently doctoring personal business records he furnished the audit committee's counsel. Oh, and this comes amid a company restatement for the past three years.
Let's pause for a reminder and a primer: The second-half recovery hasn't happened yet. And while we await patiently, the mortgage market is the main thing propping up the U.S. economy.
The mortgage market functions because Fannie Mae and Freddie Mac are there to buy mortgages. They can do this because they have a lower cost of capital because of an implied guarantee from the U.S. government. Backed by this implicit guarantee, Fannie Mae and Freddie Mac, with slightly differing degrees of risk-protection philosophies, have taken on almost Long-Term Capitalian amounts of leverage to make money. Do we need a Meriwetherman to know which way this wind blows?
Yet Freddie Mac shares and the stock market as a whole were hardly down in the morning; both fell further toward the close as the implications sunk in. It says much about the market climate that at the top of investors' minds is not the fundamentals but others' emotions.
Perhaps not panicking was the right thing to do. If this all passes without incident, Freddie Mac is a cheap stock. It seems a bit early, though. The bullish argument has been that Freddie Mac was the conservative one. After all, it was going to restate its results to make them higher.
That premise is now in question. Fannie Mae might still be taking on too much interest-rate risk. But if the head housing regulator writes in a letter that he is worried about Freddie Mac's "weakness in controls and personnel expertise in accounting areas," shouldn't equity and debt investors share that concern?
At the least, Freddie Mac's earnings will be more volatile and uneven in the future. That alone should make investors demand a higher return on their loans to Freddie Mac, raising the company's cost of capital.
Could this be the bell tolling for the end of the mortgage-market boom? Most likely not. But a little prudent worry is a healthy thing.
Updated June 10, 2003
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Group Warns Factory Weakness Could Eventually Hurt the U.S.
By TIMOTHY AEPPEL
Staff Reporter of THE WALL STREET JOURNAL
After several years of a shrinking manufacturing base, a prominent industry group warned that a loss of "critical mass" by the U.S. manufacturing sector could reduce the nation's economic growth by half and lead to widespread declines in living standards.
A new study prepared for the National Association of Manufacturers and due to be released Tuesday doesn't say how close the country may be to dropping below critical mass in manufacturing. It said if enough companies shutter factories, resulting in the loss of related activities such as research and development, this would diminish the sector's traditional contribution to overall economic growth.
The report paints a dire picture in which manufacturing is wilting by many measures -- including employment and capital spending -- even as the rest of the economy appears in the early phase of recovery.
To be sure, most experts, including economists at NAM, are predicting an upturn for manufacturers in the second half of this year and there are early signs that orders are starting to pick up. The report is part of NAM's continuing campaign to get the Bush administration to bolster the sector, including getting tougher on China in regard to its policy of pegging the Chinese currency to the U.S. dollar at an artificially high exchange rate. |
